“Direct investments,” Ball said. “Not core.”
Sichenzio called the emergency meeting of the Direct Investment Group on a February afternoon. No one knew what it was about. The executives in New York were told to meet in a special auditorium that had microphones and a speaker system hooked up to telephone lines. All the marketers in the field were to attend by conference call. They would hear everything through the communications system.
Most of the executives arrived a few minutes early and took seats around a twenty-foot conference table. At the appointed time, Sichenzio walked into the room. He looked angry, but no one thought much of it. Sichenzio usually looked angry.
There were some changes coming in the Direct Investment Group, Sichenzio said. Paul Proscia was out as head of the department. Frank Giordano, the lawyer, was taking over. But the real shocker came next.
“Effective today, the Silver Screen deal is pulled,” Sichenzio said. “It’s no longer consistent with the firm’s marketing plans. It’s a difficult sell, and we’ve got better things to do with our time.”
No one knew what to say. Almost the entire department was working on that deal. The firm had a contract to sell it. Under the direction of the Direct Investment Group, Silver Screen had spent $3 million marketing the partnership to the firm’s brokers. Then, boom, it was dead. What was going on?
David Wrubel, who had joined the department two years earlier, looked at Sichenzio with contempt. Wrubel was relatively close to Tom Bernstein and Roland Betts, the top principals of Silver Screen. Bernstein had been complaining bitterly to Wrubel about Prudential-Bache. He was used to being treated like a gentleman when he did deals with other firms, Bernstein had told him, but Pru-Bache just treated him like some pocket there to be picked.
I’ll bet they don’t even know at Silver Screen, Wrubel thought. I bet you haven’t even told them, ’cause you’re such chickenshits .
The meeting ended, and Wrubel raced out of the room. As soon as he found a phone, he called Bernstein at Silver Screen. He told Bernstein’s secretary to pull him out of a meeting.
“Listen, I can’t talk long,” Wrubel said. “We just had a meeting. They pulled the deal. Have they told you?”
“What are you talking about?”
Wrubel explained about the emergency meeting and what Sichenzio had said. “It’s a lame excuse,” Wrubel said. “Something else is going on. But I can’t talk to you now about it.”
Bernstein said he would call Wrubel at his home later.
Within a few minutes, sometime after 4:00 P.M., Sichenzio called the senior executives of Silver Screen.
“This offering will not get done at Prudential-Bache,” he said.
The Silver Screen executives demanded that Sichenzio tell them how the termination could be justified given their contract.
“You agreed to sell this,” one of the executives said. “You signed a binding contract. We spent $3 million to market this based on that assurance. How can you just come along and shut it down?”
Finally Sichenzio offered a new explanation for what was happening.
“We’re getting a lot of adverse publicity about what happened with VMS,” he said. “And we’ve heard that Business Week is putting together some article criticizing all of our real estate partnerships. We have to pull the deal.”
The Silver Screen executives angrily argued that none of this had anything to do with their deal, but Sichenzio could not be budged. It didn’t matter if Prudential-Bache had given its word to sell the deal, both morally and legally. Bad publicity was more important. The Direct Investment Group had to take a low profile.
By early 1990, Boyd Page’s legal practice in Atlanta was centered largely on suing Prudential-Bache for the Risers problem. Page had found dozens of clients who had lost huge sums of money investing in the mortgage products. Some of them had true horror stories, like Gail and Michael Parks, who lost about $79,000, almost their entire portfolio. About half of that money had been insurance proceeds from the death of Gail’s brother, and it had been held in trust for her young niece’s education. Now almost all of it was gone.
At first, it seemed as if Prudential-Bache might have been willing to settle some of the cases. Early on, Page had invited lawyers from the firm down to his office so that they could review the documents he had uncovered from months of investigation. He thought the information was damaging enough that the firm would quickly throw in the towel.
After the Pru-Bache lawyers finished their document review, Page gave them two months to respond. They never did. So he began filing his claims.
In February 1990, Page was sitting at his desk when his secretary buzzed in. He had a telephone call.
“It’s Chuck Hawkins from Business Week,” his secretary said.
Page picked up the telephone, and Hawkins identified himself. He was the Atlanta bureau chief of the weekly business magazine. Hawkins told Page that he was working on an article about the huge losses being suffered by investors in real estate deals pushed by Prudential-Bache, from VMS to Risers to others.
“Well, what can I do to help you?” Page asked.
Hawkins asked a number of questions. Page shared all the information he knew about the Risers situation, even telling Hawkins that the firm’s own lawyers had predicted the exposure on the mortgage investments alone was $175 million.
“The word we get is that Ball has decided not to address the Risers problem,” Page said. “If he takes a hit, it’s his job. From what I hear, I think they want to settle this at ten cents on the dollar.”
But, Page said, given everything he had learned, the Risers problem paled compared to the troubles in the firm’s partnerships. “Long term, the greatest threat to Bache is direct investments.”
Hawkins wrapped up his interview with one last question. “Are there any clients that you have who would be willing to talk to me about what they experienced?”
Page thought he knew the perfect people: Gail and Michael Parks. Prudential-Bache had been dragging its feet on their case. Maybe a little publicity would move things along.
“I don’t know, but maybe,” Page said. “Let me check and I’ll get back to you.”
The Business Week article in late February brought national fame to Boyd Page and his Risers cases. His clients, the Parks, were featured in a photograph looking forlorn above the headline “How Pushing Real Estate Backfired on Pru-Bache.” Page was quoted about the $175 million exposure that Prudential-Bache faced on the Risers, a number that Schechter was quoted as calling “completely untrue.”
Page liked the way the article turned out. He was now one of the national experts, as far as reporters were concerned, on Risers and Prudential-Bache. Lawyers around the country were contacting him for his advice and assistance in bringing similar cases against the firm.
Weeks after the article appeared, Page received a visit from Joel Bernstein, Sanford Kantor, and Irene Siegel, three New York lawyers who were pursuing Risers cases themselves. Page agreed to share some information with them about his cases. The four lawyers went out to lunch at Trio’s, a restaurant next door to Page’s office. There they discussed the legal issues of the cases for more than an hour.
As they returned to Page & Bacek, laughing as they stepped into the lobby, Donald Bacek, Page’s law partner, emerged from his office looking serious. He hurried toward the group with a small sheaf of papers in his hand.
“You’re not going to believe this,” Bacek said, handing the papers to Page.
Page looked at the cover sheet, then flipped to the first page. It was a claim that had just been filed in federal court in Atlanta. Page read the caption on the case, then read it again.
“Prudential-Bache Securities Inc. v. Page & Bacek.”
The lawsuit, which had been approved for filing by Loren Schechter, accused Page of conspiring to subvert Prudential-Bache business by encouraging its customers to sue the firm. It claimed that Page, like some legal Svengali, was single-handedly underminin
g the confidence of Pru-Bache employees in the firm and encouraging them to steal confidential, proprietary documents that he then used in litigation.
Apparently the Business Week story had struck a nerve. Prudential-Bache was stepping up its legal hardball several notches. Schechter had adopted the strategy that the best defense was a good offense. If clients insisted on suing the firm, then Pru-Bache would bury their lawyers with litigation. The more time Boyd Page spent defending himself in court, the less time he could spend attacking Prudential-Bache.
Page read through each page carefully. “Well, I’ll be damned,” he said softly.
“This is the most outrageous thing I’ve ever seen in my life,” Bernstein said. “Who do these people think they are?”
Page looked up at the astonished lawyers. “Well, what do we do now?”
Fridays had become tense at the Direct Investment Group ever since word first came out that Giordano would be taking over. Everyone knew the end was coming. Big layoffs would almost certainly occur on the last day of the week, when a pay period closed. The department was loaded with the condemned, all readying themselves for execution. The days of big sales were over. The only question was who would be thrown out, and when.
Giordano took over on March 8. Within a few weeks, he began dismantling virtually the entire department. The layoffs continued for months. The regional marketers heard the news from Giordano by conference call.
“I’m calling to let all of you know that Pru-Bache has decided that direct investments no longer fit into the marketing plans and they are proceeding to dissolve the department,” he told the stunned group over the phone. “You are all being terminated.”
Before they left, all of the marketers were instructed to pack up the marketing materials and other documents they had collected over the years and ship them to New York, where they were turned over to the firm’s lawyers.
The dismissals in New York were swift. Anyone who was fired was barred from returning to the office. Even Bill Pittman, who was fired in the spring of 1990, was listed with the security department as someone to be stopped in the lobby.
David Wrubel heard about his termination directly from Giordano. To a degree, he felt relieved. For months, he had been handling some communication with brokers, and their anguish was beginning to get to him.
Afterward, Wrubel headed out of his office and down the hallway on the thirty-third floor. He saw Russell Labrasca, who months earlier had been named national sales manager of the department. He was sitting in his glass-walled office, tears streaming down his face. He looked as if his world had come to an end.
Wrubel hated Labrasca’s public display and thought it was unprofessional. He walked into Labrasca’s office.
“Hey, Russ,” he said. “What’s the matter with you?”
Labrasca sniffled. “This is so sad,” Labrasca said as the tears kept pouring out. “This was such a wonderful place, and we accomplished so much. There’ll never be anything like it again, with the camaraderie and the teamwork and the spirit.”
Wrubel’s face wrinkled in disgust. He had been in the department only two years but had seen a lifetime’s worth of unprofessionalism and incompetence. He’d seen the wild excesses of spending. He knew how little anyone cared about protecting investors and doing deals properly. He thought everything Labrasca said was a total crock.
“Give me a break, Russ,” Wrubel said. “This was bullshit. That’s all it ever was.”
CHAPTER 16
BY THE SPRING OF 1990, brokers and executives throughout Prudential-Bache were ready to choose sides. Responsible brokers desperately wanted to salvage their customers’ floundering finances. The Prudential-Bache law department wanted a united front, with the brokers lined up with the firm against their own clients. There were no recordings of what the brokers had said to the clients when they had persuaded them to buy the partnerships and other failed investments. Just because the marketing material made fraudulent claims didn’t mean the sales force used that material, the argument went. Somewhere in the thick prospectuses for the investments were convoluted warnings about risk. That would be the defense. With the prospectus as a shield, Prudential-Bache hoped it could eliminate most of its massive liability.
Throughout the country, brokers were facing the choice of defending Prudential-Bache or risking their careers by fighting on behalf of their clients. A modern-day battle was quietly unfolding with many Davids against a single Goliath.
Bill Creedon felt disgusted as he read a copy of a letter that had been sent to his clients by the Prudential-Bache law department. For months, the Los Angeles stockbroker had followed the recommendations of the firm’s lawyers and helped his clients write letters about their VMS investments. The letters laid out what the clients had been told about the guarantees, as well as their investment objectives, their ages, and other relevant information. Creedon thought the letters would be reviewed and then settlements offered. After all, the clients had been sold a supposedly guaranteed investment for $10 a share, and now it was trading for fifty cents. The case was a sure loser.
Starting in late April, his clients began calling him in dismay. They had received letters in response from the law department expressing regret at their dissatisfaction but saying that the firm could not offer certainty on an investment. Creedon fumed—that was exactly what Pru-Bache had done with all that talk about viable guarantees.
But it was one of the last paragraphs of the letter that Creedon found most noxious. A class-action suit had been filed in Chicago on behalf of VMS investors. The law department’s letter told the investors all about the class action and even provided the case number. Reading it, Creedon felt certain that Prudential-Bache was trying to push everyone it could into the class-action suit.
Although investors might not know what that meant, Creedon was sure that the law department did. It was a despicable move. Anyone who didn’t take the class action could sue the firm individually. Those investors not only had the opportunity to get all of their money back, plus interest, but they also could win punitive damages.
On the other hand, too many class-action lawyers in serious securities fraud cases behave in ways that make ambulance chasers look like the backbone of the bar. Few of the lawyers take any class actions to trial. Instead, they almost always settle for a few pennies on the dollar. Investors who lost tens of thousands of dollars usually receive a few hundred back. But the lawyers, who take as much as 35 percent of the total settlement, can walk away with millions for very little work. Creedon knew that the only people who would benefit from a class-action sellout on VMS would be the lawyers and Prudential-Bache itself, which would obliterate its huge liability for a small settlement.
Some brokers and managers around Pru-Bache’s office greeted the law department’s response as a stroke of genius. It was laughingly called “the fuck-you letter.” Some brokers particularly liked the class-action angle. If clients sued individually, those complaints would likely show up on the brokers’ permanent records. But class-action settlements never do.
Creedon got up from his desk and headed toward the office of his manager, John Eisle.
“John, I’m really concerned about something here,” Creedon said. “I’d been told that all the clients’ cases were going to be looked at on an individual basis, but now they’re all getting form-letter brush-offs.”
“This is how we’re going to handle this,” Eisle said. “The clients are going to go into the class-action suit. That’s how this problem is going to be taken care of.”
Creedon started voicing concerns about pushing clients toward the class action, but Eisle cut him off.
“Look, this is how we’re dealing with this, and it’s none of your business,” he said. “You’re spending far too much time worrying about this.”
“John, it is my business. It’s my clients that are being hurt.”
“Well, then stop being so concerned about these clients and go find some new ones,” Eisle replied.
Creedon didn’t know how to respond. Apparently the firm was prepared to let elderly investors around the country take the hit for the VMS duplicity. At that moment, his confidence in the integrity of Prudential-Bache evaporated.
“Look, John, I think Prudential is making a big mistake here,” he said.
“They’re handling this all wrong. All they’re going to do is piss everybody off. Everybody knows what really happened here. There’s a lot to be gained by being upright and standing behind something when you sell it.”
“Well, that’s because you’re focusing too much on this,” Eisle said. “Go find new clients. And with your old clients, the only thing you can talk with them about is the class-action suit. Other than that, you should really stop talking to them.”
Creedon stared at Eisle for an instant, unsure of what to say. He was hearing the same instructions that were being delivered to brokers around the country: Betray your clients, sell them out, get new ones.17 The broker would emerge unscathed, and the firm would be protected.
Within weeks, Creedon began receiving desperate telephone calls from investors asking what to do. As a test, he referred them to Eisle, his manager. Each time, the investors came back saying that Eisle had told them their only option was joining the class action. Creedon quietly told them to check that claim out with their own lawyers.
In the late summer, clients started to call Creedon asking for his advice about the class-action suit and other legal rights they might have. Creedon said he would have to call them back, and walked down the hall again to visit with Eisle.
“John, my clients are very uncomfortable with the class-action idea,” he said. “They want to know what other options they have. I want to fully disclose their rights. Let them know they can go to arbitration, or at the very least tell them to talk to a lawyer. I think I have a fiduciary duty to do that.”
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